July 14, 2008
As an insurance agent who was previously licensed as a Registered Representative with a Series 6 Series 63, I am in firm opposition to the SEC attempt to classify index annuities as a security product. There is a bold difference between risk-based products and safety-based products with minimum underlying guarantees. The SEC should stick to regulating risk-based products and leave its hands off of safety-based products. The securities business is greed-driven and is designed for speculators, while the insurance business is safety-driven and designed for those seeking guarantees. Prior to the Great Depression, there were no rules preventing banks from getting into the speculation business. The Great Depression resulted from rampant greed during the 1920's. The only industry that survived the Great Depression relatively unscathed was the insurance industry. When we as insurance people talk about guarantees, we mean guarantees and that is something that the securities people will never understand. When the Great Depression occurred, government had to intervene and establish rules for the financial services industry ... rules which in effect left banking to the banks, speculation to the securities industry, and guarantees to the insurance companies. This system worked fine for decades and decades ... that is until the Financial Services Modernization Act which served to destroy the rules which resulted from the Great Depression. Now look at what has happened in the past 9 years ... banks are now in the securities and insurance business, insurance companies are now in the bank and securities business, and securities businesses are in the bank and insurance businesses. This does nothing more than confuse the general public and open the general public up to abuses from greed-driven securities representatives. And furthermore, we have seen nothing less than a major economic destabilization that I believe is a direct result of the Financial Services Modernization Act.
Look ... I deal with retired people on a daily basis. It is the retirees who hold the majority of the wealth in today's economy. Retirees are not hurt by insurance products such as index annuities. What hurts retirees is when securities "professionals" take the vast majority of their lifetime of savings and put it at risk in the stock market. What hurts retirees is when insurance agents place their money at risk in a variable, stock-market based annuity contract and abuse the word "annuity" to try to convince the retiree that there is some sort of underlying guarantee in the variable annuity. What hurts retirees is when they walk into their bank and get shuttled over to the investment representative who turns around and takes their money out of safety-based products and places them into risk-based products. This is how the general public gets abused, and these are the practices that the SEC should be regulating.
Yet the SEC tries to demonize someone like me ... someone who recommends to a 70 year old that he or she needs a greater level of stability and a greater level of guarantees when it comes to their lifetime of savings. The SEC tries to make people like me out to be the greed-based, commission-driven problem. Well, my friends ... my clients are going to bed tonight not worried about losing their savings in the stock market. My clients aren't worried about IndyMac Bank being shut down this past Friday by the Federal Government. My clients aren't worried about what sort of market turmoil will occur tomorrow morning and whether or not Fannie Mae Freddie Mac are going to make it. My clients are secure, and that is something that you will never understand
Let's look back to the fabulous market growth of the 1990's? What caused it?? In its simplest terms, the stock market is nothing more than a bucket with a hole in the bottom of it. If water pours into the top of that bucket faster than what it is flowing out of the bottom, then the bucket will rise in value. If the hole in the bottom of the bucket loses water faster than new water is poured into the top of the bucket, then the level of water in the bucket will go down. Now, let's look at this "bucket theory" in terms of the stock market. During the great growth of the 1990's, the majority of that growth was fueled by more money going into the bucket than what was coming out. Pension buyouts ... a max exodus of money from safety-based to risk-based ... helped fuel this growth. Baby-boomers realizing that retirement was near helped fuel this growth. The 1990's were good market years, but the result of those good years ends up being dangerous times now for newly retired Americans who have too much of their personal wealth at risk in the speculative products. Is the SEC regulating this? Absolutely not
Let's look at the banks. Since the Financial Services Modernization Act, what has happened with the majority of bank deposits? Are the banks encouraging their customers to put funds into safety-based products, or are the banks encouraging their customers to put funds into risk-based products? Which is better for the bank ... to make a little bit of profit by recommending safety like a CD to someone, or to make ongoing fees and commissions by recommending risk-based products which the banks do not have to provide any sort of guarantee on? How much bank money has been shifted from safety to risk over the past decade? Is the SEC regulating this??
Let's look at insurance companies ... the majority of which are now heavily involved in the risk market instead of the safety market. Why is it that a company like Prudential Financial with whom I was previously employed offer only 1 or 2 safety-based products while offering 20 risk-based products?? Is it because it is better for the client to have a variable annuity, or is it because it is better for Prudential Financial to put the client into a variable annuity? Is the SEC regulating this??
Being in the traditional insurance business, I will give you my opinion on the previous questions that I have posed. My opinion is that the SEC is failing miserably at everything that it should be doing and trying to regulate things that the SEC doesn't have any business regulating. When a firm is caught with their "hand in the cookie jar", the SEC is sure to come along and place fines on that company ... but at the same time the fines that at assessed often make the SEC a buck but pale in comparison to the fees and commissions generated by the firm who broke the rules to begin with. If the SEC is interested in regulating abuses, then why doesn't the SEC punish these rule-breakers with a very heavy hand? I think it is because the SEC doesn't really want to dissuade these practices of breaking the rules. If the SEC was serious about their job of regulating the speculators out there, then the speculators would not abuse the system in favor of greed. The problem for the SEC is that there would be no future fines to assess and collect against speculators if the SEC took a stronger stance against such abuses. You, see ... the SEC has a motive too.
So, SEC ... in my opinion, you should just leave the insurance industry alone unless a particular insurance company chooses to be involved in risk-based products such as variable annuities, mutual funds, or variable life. For those insurance company products that focus on safety-based products such as fixed-indexed annuities, the SEC would be better served to spend their time and resources trying to solve issues in the speculation business that I feel are being largely ignored at the present. Because these issues in the speculation business are being largely ignored, the average US retiree is in quite the precarious position at present. And because of this precarious position, the average US retiree will be ultimately be the only one who suffers if an extended economic downturn does continue while the Wall Street speculators will mostly survive the economic downturn unscathed. And in my opinion, the ultimate result will more than likely be that the federal government has to intervene in things yet again to restore balance to our financial services industry. How will this be accomplished? Most likely the only way to accomplish it is to repeal the Financial Services Modernization Act and go back to the old rules instituted as a result of the Great Depression ... old rules which limits the greed-based speculators from commingling with the safety-based guarantors.
In the end, growing wealth and preserving wealth are two different monsters. To mix the two is like trying to mix oil and water ... it just doesn't work. Professionals who focus on preserving client wealth such as myself would never consider using a risk-based product for preservation purposes. Professionals who are there to grow client wealth such as brokers do nothing more than peddle greed while painting a picture of everything that is glorious in the economy while using the lure of higher potential returns to suck clients into speculative investments. How easy is it for a broker to do this? Consider the two examples below:
1) Mr. Client ... are you aggressive or conservative? Client answers conservative 99% of the time thinking that conservative means safe. Broker knows that conservative simply means conservative risk. Client ends up with risk when they really wanted something with guarantees in the first place.
2) "Mrs. Client ... I know of a way for you to get more money" says the bank broker. "More money?" replies 88 year old Ethel. "I would like more money" So the bank broker says, "Just go ahead and sign here, Ethel."
These are just 2 basic illustrations of how easy it has become for the risk-based speculator out there to peddle greed. Whether you believe it or not, the vast majority of the clients that I work with in my practice have been sucked into the stock market in the past via 1 of these 2 examples. These are clients that would not be able to tell you the difference between a stock and a bond. These are clients who are talked into dumping most of their life savings in the stock market with no level of guarantee. These are clients who never wanted to take a risk in the first place.
SEC ... you are failing miserably in my opinion at the job that you are there to do. When you get your act cleaned up, then maybe it is time for the banks, insurance companies, and Wall Street firms to think of having one regulatory body. But don't even think of chastising, regulating, or demonizing what I do in the business of safety and guarantees in the meantime.
On a side note ... I have sent inquiries several times before to the SEC on the very important topic of securities licenses that I have never received any sort of response on. For people such as myself who are in the safety business and are not interested in the speculator business, I feel as if it is still VERY important to allow us to get licensed with the SEC. When I made the transistion from the risk-based marketplace to the safety-based marketplace, I ultimately had to let my Series 6 63 licenses lapse because I no longer had a sponsoring firm to hold my licenses. I could have found a firm to sponsor my licenses, but it would have cost me hundreds of dollars a month to keep those licenses active despite the fact that I would not be soliciting any risk-based products. So being in the insurance industry, I am constantly concerned about helping clients with their questions relating to their stocks, bonds, and mutual funds because I am no longer securities licensed and do not want to end up getting sued for talking about securities without a license. I have made the recommendation to the SEC in my past inquiries that it should be a priority to the SEC to allow people such as myself to be licensed in securities without requiring a sponsoring firm. It is my recommendation that people such as myself ... professionals who want to be securities licensed in order to talk about them with clients but who will not be out soliciting the sale of securities ... should be able to earn their securities licenses and "park" the license directly with the SEC instead of the SEC requiring me to find a sponsoring firm. Because of the requirement regarding the need for a sponsoring firm, the SEC should realize that there is a significant imbalance that exists out there relating to securities ... those who push securities and make a profit off of them are the only ones who are securities licensed and can talk about them, while those of us who promote safety and generally recommend against too much risk are not allowed to talk about securities because none of us can afford to carry the securities licenses because of the fees charged by sponsoring firms. We cannot afford the fees of the sponsoring firm because we are not deriving commissions off of the sale of security products. This is a VERY SERIOUS problem ... and if the SEC is there to promote the well-being of the typical investor / saver, then the SEC should allow safety experts to also become securities licensed and park those licenses with the SEC to promote better balance between the speculators vs. the guarantors. Because of the current licensing policies of the SEC, the speculators are given a significant advantage over the guarantors.
And if the SEC ends up regulating fixed-indexed annuities ... a valuable tool used by the guarantors of the financial services industry ... then I feel as if the SEC will twist the rules so that the speculators are given even a bigger advantage over the guarantors. I just don't see how the guarantors of the industry receive any benefit out of the SEC regulating fixed-index annuities, and most importantly, I don't see how the clients receive any benefit either. I do see how the specultors will receive a benefit of the SEC regulation, as it will just give the speculators another foot in the client's door.
I know these comments are exhaustive, so I appreciate you taking the time to read my concerns.
Thank you,
Wade S. Ritchie